Zoning for Profits: How Public Finance Shapes Land Supply in China

Zhiguo He (), Scott T. Nelson, Yang Su, Anthony Lee Zhang and Fudong Zhang

No 30504, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Public finance and real estate are uniquely intertwined in China, where local governments also serve as monopolist sellers of land. We shed new light on how land sale decisions and land prices depend on local governments’ financing objectives. First, we document the large (ten-fold) price premium paid for residential-zoned relative to industrial-zoned land and show this price premium can be explained by the greater future tax revenues generated by industrial land; the choice to sell land as industrial rather than residential generates an IRR of 7.70%, which is comparable to local governments’ cost of capital in bond markets. Second, local governments are sensitive to financing constraints: industrial land supply decreases with governments’ bond yields. Third, local governments’ land sales are sensitive to the intergovernmental tax sharing, such that industrial land sales increase with the share of taxes captured by local governments. Thus, shocks to local public finances can be expected to affect the Chinese real estate market and vice versa.

JEL-codes: G31 H70 R14 R38 (search for similar items in EconPapers)
Date: 2022-09
New Economics Papers: this item is included in nep-cna, nep-pub and nep-ure
Note: AP CF DEV PE POL
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